How to tell if a home insurance settlement is fair

A regular reader (and friend of mine) emailed this week asking for help in assessing whether or not their proposed home insurance settlement was fair. Turns out a tree had fallen on her home’s roof over the holiday season and she wanted to know if her insurance provider—who was offering $14,000 in compensation for the damage—had made a fair offer.

Problem is not everyone has a former insurance magazine editor on speed dial (or answering her emails). Thing is, most of us could use a little unbiased advice when it comes to insurance—a simple way to assess whether or not we’re getting value (the settlement) for what they pay for (home insurance coverage). While I can’t review every insurance settlement, I can offer some general insight on how to best assess an insurance company’s offer.

First, however, I need to stress an obvious, but often overlooked, fact: Insurance settlements are not windfalls. It’s not a way to make money or a way to upgrade your home. Nor should claims be used to cover expenses for repairs or to replace maintenance costs associated with owning a property. Fact is: if you own a home (or condo, or other type of residential real estate) part of that ownership includes paying for upkeep. And that sometimes includes expensive and unexpected costs.

But if you find yourself in an unexpected and expensive situation—such as a basement full of water or a hole in your roof from a fallen tree—than making a claim is often the way to go. It’s what we pay for, right?

Determine if the insurance settlement is fair

But once you’ve made the claim, and the adjuster has done their due diligence, you should be looking at a proposed insurance settlement—a sum of money your insurance provider is willing to pay to fix the unexpected problem. To determine if the proposed settlement is fair, we first need to understand how claims are processed. Let’s use my friend’s recent example:

The insurance adjuster estimated the repairs to her roof at $17,153.86, including HST.

However, insurance policy coverage doesn’t include HST, so you need to deduct $1,973.45 from the cost. This means my friend’s maximum claim coverage is $15,180.41. (Go here for a great work-back HST calculator.)

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But the insurance policy only covers the “actual cash value” (ACV) of the damaged roof. ACV is the term used by insurance companies to capture the fact that all goods depreciate in value over time. For my friend it means that the age of her roof, as well as the roof’s typical life-expectancy, should impact her settlement amount. In this case, my friend’s roof shingles were installed 5 years ago, and have a guaranteed 25-year lifespan (according to the roof shingle manufacturer). Hence, her roof has depreciated in value (based on age and life expectancy) by 20%. The ACV, then, is $12,144.33 (or a 20% reduction from the $15,180.41 maximum claim coverage).

At a $1,000 deductible, this means my friend will receive $11,144.33 on her claim. (Although, some insurance companies will actually waive the deductible, if it’s your first claim, or if you have something called a “disappearing deductible.” Talk to your provider for details.)

Basic tips on when to make a claim

In essence, your home insurance policy is your “get out of debt” card—to be used only when the impact of a repair cost would be catastrophic (or at least a hardship) on your finances. It means you need to be judicious about making a claim. As a rule of thumb, here’s how to decide on when to make a claim:

→ Never file a claim if the deductible is bigger than the repair cost. The biggest reason is that you’ll end up increasing your home insurance rates (because you made a claim) and you’ll end up paying for the repairs because you first need to pay the deductible. So, if you’re deductible is $1,000 and the repairs are $3,000, you’ll only get $2,000 from your insurance provider.

→ Don’t submit claims for what is really a home-maintenance project. If the fence is rotting away and you know that one big windstorm will blow it over, budget the household finances for a new fence first. There’s a plus to this too: better maintained homes get better premiums.

→ Make sure you’re actually covered for the claim you’re making. For example: as a homeowner you may assume that your flooded basement will be covered but that’s not the case. Traditional home insurance policies don’t cover flood damage. For this, you need to purchase extra insurance—known as a rider. (And don’t be too surprised if your insurance provider refuses to offer this extra coverage. For instance homeowners in certain Hamilton, Ont. neighbourhoods, or in certain parts of Manitoba, will find it impossible to get flood insurance, as they live in designated flood zones.) Now back to that claim: If you make a claim and you’re not covered you won’t see any money. Worse, your claim is now on record, which is used to assess the premiums you pay. The more claims you make, the higher your premiums.

→ This brings me to my last tip: Don’t be a repeat-claimer. Remember: The more you claim, the higher your premiums. That said, it’s statistically not unusual for a homeowner to file up to two claims in a 10-year period—but any more than two and alarm bells will go off (even as they are increasing your rates).

Factors that impact your policy and rates

Of course, even without a claim, it’s nice to know what factors will impact your home’s insurance rates. Here’s a few reference charts, created by Insureye.com, that clearly illustrate what factors determine your insurance premiums.

The first chart shows the seven building and construction elements that impact your home’s insurance premiums.

(Insureye.com)

The second chart shows the three geographic and location elements that will impact your home’s insurance premiums:

(Insureye.com)

The third and final chart shows the five insurance needs will impact your home’s insurance premiums:

(Insureye.com)

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